Saturday, October 24, 2015

Milanovic On Inequality Sources

Concern about the negative effects of inequality has led to many policy proposals. Most of our proposed policies do something like redistribute outcomes; so it’s very much looking at the end result and shifting things around to what we think is a better distribution.

On the other hand, we probably ought to be more concerned about inequality in inputs. The reason is that it’s probably less serious if two people get the same inputs and produce unequal outputs, than if we give them unequal inputs to start with.

So, what’s the source of inequality. In contemporary circles, we hear a lot of discussion about race, gender, and class as sources of inequality.

Milanovic* looks at the most important inequality: the global kind. It’s kind of morally repugnant to not focus on this aspect. Consider this: how do we justify looking at, say, some Americans, not having as much stuff as some other Americans do … when there are people in other countries who may not have enough food.

But what Milanovic shows is that most inequality globally is not determined by race and gender and class, but rather by location of your birth and who your parents are.

Specifically, about 60% of global poverty is simply bad luck: you were born into a poor region. The best short-term solution to alleviate this is to encourage people to move to richer areas. That will work, but is politically unpopular just about everywhere. But the effectiveness of this method is mind-boggling: Milanovic estimates that the typical resident of the Democratic Republic of Congo (the poorest country in his sample) can more than quadruple their income simply by moving to the U.S.

(Of course, the story all summer and fall has been refugees fleeing the Middle East and Africa into western Europe. Now you know why. Further, a dirty-little-secret of that mass migration is the extent to which it is otherwise middle class people from the Middle East — they have the money to flee, and the time is ripe.)

The longer term solution to that is economic growth. We do know that regions do converge relatively rapidly if the only differences are resources and high tech. But it is the low tech institutions that don’t transmit well across borders, so the long term solution is really go do into poor places and change their institutions. This is called nation-building, and it’s what got Bush II into trouble in Iraq (and on a lesser scale, Clinton into trouble in Somalia … you know … the backstory to the film Black Hawk Down). It’s not clear that this is a politically viable solution either.

The next fraction of inequality, about 20%, is explained by who your parents are. Roughly, if your parents are slackers, you’ll likely end up on the bad end of inequality. The best short-term solution to alleviate this is to take kids away from their parents. You can imagine how that goes over in most places.

The more heinous long-term solution is to encourage the problem parents to have fewer kids. In short, this is the policy of the Nazis, or else the softer forms of eugenics (usually involving forced sterilization) that were popular 75-100 years ago. This is not a politically viable or desirable solution either. Of course, education about family planning, and access to birth control methods is an alternative that works … but that runs into religious strictures in some locations. We can also try to “scare people straight” with more information about the scope and magnitude of the personal costs to being a parent; but it’s hard to get people to think clearly about those issues.

Here’s an interview with Milanovic. I find it interesting that the interviewer glosses over the above points, and pretty much goes straight to what can we do about race and gender. Those are hot topics, and I don’t want to dismiss people’s interest in them. But we need to be clear-eyed that they are tertiary: no matter what we do about the no-more-than-20% that is due to race and gender, it’s still going to be swamped by the 80%-that-isn’t-race-and-gender that we can’t do much about. By analogy, this is like coaching basketball by noting that there is inequality between the best and worst teams, then ignoring the dribbling, passing, and shooting, and trying to make your team better by increasing just rebounding and steals. That certainly won’t hurt, but it probably won’t win many games for you.

I love this chart drawn from Milanovic’s recent paper in the Review of Economics and Statistics.

The way to read this is to note that poorer people within a country are on the left, and the poorer people on the globe are at the bottom. So if we take the poorest people in the USA, we then go towards the right and find that they would be middle-class in China, and in the lower part of the upper class in India. But if we take those poorest people in America, we find by going downwards that they really don’t rate as poor at all on the global scale of things.

That raises a big moral question. Why is it OK to be concerned about the poor within the borders of the United States, when there are people outside our borders who are poorer? This doesn’t have good answers, But for another analogy, it’s like professors being concerned that their kids choose to eat ramen for lunch, and then go to school to teach college students who sometimes have to eat ramen for dinner. Is the professor’s concern for their own children reasonable? I’m not sure any of us know. But if we don’t know the answer to that question, why are we so sure that we need to help the not-that-poor people inside America’s borders more than the definitely poorer people on the other side?

* Milanovic, B. “Global Inequality of Opportunity: How Much of Our Income Is Determined by Where We Live?”, Review of Economics and Statistics, 2015, 97, 452-460.